What is a general solicitation?
General Solicitation is the act of marketing a capital raise publicly. Rule 506(b) of Regulation D prohibits using general solicitation to market securities. General solicitation is undefined in the statutes or rules, and the Securities and Exchange Commission (SEC) takes a case by case approach. A typical example of general solicitation is telling potential investors in a newspaper the terms of an offering and inviting them to purchase securities.
Rule 502(c) prohibits:
(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television and radio; and
Any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
A pre-existing relationship between the issuer and a potential investor is strong evidence that general solicitation has not taken place. A relationship is pre-existing if the relationship was formed before a securities offering commences, or when it was established through a registered broker-dealer or investment adviser before the registered broker dealer or investment adviser participated in the offering.
A pre-existing relationshipmay arise in business, social settings, or any other context. The general rule is that the pre-existing relationship must be of some duration and substance. The SEC defines a substantive relationship as “[a relationship] in which the issuer (or person acting on its behalf) has sufficient information to evaluate, and does, in fact evaluate, a prospective offeree’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.”
The relationship must be established from actual effort to get to know the person, rather than“just checking some box” or waiting a set amount of time.
The SEC has stated in past no-action letters that a third-party broker-dealer may establish a pre-existing relationship with a potential investor by sending the potential investor a generic form that providesenough information for evaluation of the potential investor’s financial circumstances. The generic form may not reference the offering the issuer is undertaking. See: http://www.wnj.com/files/Publication/a941cb2d-f6db-40da-9cb0-85b44f514c70/Presentation/PublicationAttachment/ba8ac6ec-6388-4a90-b2facb6b5b30328d/FAQ_Regarding_the_Private_Placement_of_Securities_under_Regulation_D_Rule_506.pdf